2018 Management Discussion and Analysis
Management Discussion and Analysis This Management Discussion and Analysis ( MD&A ), dated July 27, 2018, analyses the consolidated financial position of DIAGNOS Inc. and its subsidiaries ( DIAGNOS, the Corporation or We ) as at March 31, 2018 and for the three-month and year ended March 31, 2018 and should be read in conjunction with the March 31, 2018 consolidated financial statements and accompanying notes. The currency used is the Canadian dollar unless otherwise stated. This MD&A was approved by the Board of Directors on July 27, 2018 and takes into account information available up to the filing date on SEDAR. Description and Objective This MD&A is a narrative explanation, through the eyes of management, of the Corporation s performance during the periods covered by the financial statements, and of the Corporation's financial condition and future prospects. This MD&A complements and supplements the Corporation s financial statements, but does not form part of the Corporation s financial statements. The objective of this MD&A is to improve the Corporation's overall financial disclosures by providing a balanced discussion of the Corporation's financial performance and financial condition. Going concern assumption The March 31, 2018 consolidated financial statements have been prepared on a going concern basis, which assumes that the Corporation will continue to operate for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of business. The Corporation s current level of revenue is not sufficient to cover its expenses and ongoing commitments. The Corporation's ability to generate positive cash flows from its operating activities is dependent on achieving and maintaining profitable operations. Since inception, the Corporation has been able to finance its activities and operate on a going concern basis through issuances of common shares, stock warrants, convertible notes, convertible debentures and demand loans. On July 4, 2018, the Corporation closed a private placement of 800,000 through the issuance of convertible debentures and stock warrants. In the near term, the Corporation intends to continue seeking additional financing through the issuance of debt and equity instruments to meet its operating and financial obligations. While the Corporation has been successful in securing financing in the past, there can be no assurance it will be able to do so in the future, that such sources of funding or initiatives will be available on terms acceptable to the Corporation. If the Corporation is unable to obtain sufficient additional funding, it may be unable to continue its operations, and amounts from the sale of assets might be less than the amounts reflected in these consolidated financial statements. The March 31, 2018 consolidated financial statements do not reflect any adjustments that would be necessary if the going concern basis was not appropriate. Such adjustments, if required, may be material. Forward-looking statements This MD&A contains certain forward-looking statements with respect to the Corporation. By their nature, these forward-looking statements necessarily imply risks and uncertainties that could cause actual results to differ materially from those contemplated by these forward-looking statements. These risks and uncertainties include risks associated with market acceptance, competitive developments, the world economic situation and other factors. Except for ongoing obligations under securities laws to disclose all material information to investors, we disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 1
Non-GAAP financial measures This MD&A contains certain non-gaap financial measures. A non-gaap financial measure is a numerical measure of an issuer's historical or future financial performance, financial position or cash flow that is not specified, defined or determined under the Corporation s GAAP (as that term is defined in Regulation 52-107 respecting Acceptable Accounting Principles and Auditing Standards) and is not presented in the Corporation s financial statements. Non-GAAP financial measures presented in this document are: Backlog: The backlog amount is composed of sales bookings for services not yet rendered. Bookings: Booking amounts represent signed agreements for which a value can be estimated. Research and development refundable tax credit provisions in proportion to research and development expenses. Working capital: the working capital amount is obtained by subtracting accounts payable and accrued liabilities and other current liabilities from cash, non-restricted short-term investments and accounts receivable. Description of the Corporation and activities DIAGNOS has built an Artificial Intelligence ( AI ) platform called FLAIRE to provide assistance to general practitioners in interpreting medical imaging at the primary care facilities. The Corporation operates in Healthcare and offers image analysis services through Computer Assisted Retinal Analysis (CARA), a software tool, which assists health specialists in the detection of diabetic retinopathy. Its geographical footprint spans across fifteen countries. DIAGNOS is currently listed on the Toronto Venture Exchange where it trades under the stock symbol of ADK and the OTCQB under the symbol DGNOF. DIAGNOS group of entities, as at March 31, 2018, is organized as follows: DIAGNOS operates in the following sectors: Healthcare: Image analysis services through CARA (Computer Assisted Retinal Analysis), a software tool which assists health specialists in the detection of diabetic retinopathy. CARA is an in-house hosted web-based application that integrates fundus cameras with an image processing engine over a secure internet connection. CARA has been developed by, and is proprietary to, DIAGNOS. 2
Natural resources: Data mining consulting services through CARDS (Computer Aided Resource Detection System), a software tool used to assist exploration companies in identifying mining deposits. In combination with modern exploration techniques, CARDS is a useful tool intended to save both money and time by targeting priority (or prioritizing) areas for exploration. In addition to data mining and target generation, DIAGNOS offers project management services. CARDS has been developed by, and is proprietary to, DIAGNOS. As of May 25 th, 2017, the Corporation operates only one segment, Healthcare, following the sale of the mining division. Healthcare (CARA) The AI market in healthcare has high growth opportunities due to rising needs of self-care and real-time monitoring. Globally, AI in healthcare market is driven by the ability to improve patient outcomes, increase in need for coordination between healthcare workforce & patients, rise in adoption of precision medicine, significant use of big data in the healthcare sector, and remarkable rise in venture capital investments. Key healthcare applications using AI at present include Intelligent Diagnostics, Patient and Provider Data Management, Drug Discovery Process with Advanced Analytics, and Medical Devices and Robotics. According to Allied Market Research, the global AI in healthcare market was valued at 1,441 million in 2016, and is estimated to reach at 22,790 million by 2023. With its established CARA technology and worldwide presence, we believe DIAGNOS is well positioned to capture a sizeable portion of the AI market in healthcare. Over the next decade, artificial intelligence is expected to fundamentally transform the diagnostic imaging market where the focus would be towards meeting the rising demand for imaging examinations, prevent diagnostic errors, and enable sustained productivity increases rather than replacing the need for radiologists. As per an IBM research, medical images account for 90% of all the medical data which makes it the largest data source in healthcare industry. Nowadays, healthcare algorithms are created to get more accurate and quicker diagnosis. Presently medical imaging is helpful in tumour detection, tracking tumour development, blood flow visualization, medical interpretation and diabetic retinopathy. The Corporation has developed a proprietary set of algorithms and associated software platforms to assist eye specialists in the detection of diabetic retinopathy. According to the Canadian Diabetes Association, diabetic retinopathy is the most common cause of blindness in people under age 65 and the most common cause of new blindness in North America. Also according to the Canadian Diabetes Association, it is estimated that approximately 2 million individuals in Canada (i.e. almost all people with diagnosed diabetes) have some form of diabetic retinopathy. According to the World Health Organization, the number of people with diabetes worldwide has risen from 108 million in 1980 to 422 million in 2014. The application is named CARA, which stands for Computer Assisted Retinal Analysis. The Corporation s management view is that this application will contribute to the increase in revenue streams based on the fact that automating the screening process for diabetic retinopathy will benefit the healthcare system. CARA can be deployed in many countries and has received certifications from Health Canada, the US Food and Drug Administration in the United States of America and CE in the European Union. The CARA suite of applications allows an eye care specialist to more clearly visualize both normal retinal landmarks (optic nerve, vascular system, macula, fovea), as well as pathological changes (exudates, haemorrhages, micro-aneurisms, neovascularisation). Services vary from image enhancement only, to turn-key solutions including deploying imaging equipment on a mobile basis using the Corporation s staff. During the period covered by this document, the Corporation has actively been developing CARDIO, a software tool being tested by DIAGNOS to detect patients at risk of developing cardiovascular desease. A few other healthcare-focused software tools are presently in the development phase, such as Sleep Apnea and Alzheimer s disease. 3
Unchanged from the last reporting period, for the commercialization of CARA, we currently have a presence either directly or through resellers in North America (Canada, USA and Mexico), Africa (Algeria), Middle-East (some countries of the Gulf Cooperation Council) and India. We intend to continue increasing our presence in the USA. CARA has proven its value to patients in these markets. Our focus going forward is to leverage that proven ability to, (i) continue to build revenue and sales in emerging markets, and, (ii) to substantially grow our sales and marketing successes in the US and Canada, where we believe CARA offers a unique value proposition to payers and patients. The addition of a new US based board member is accelerating the business development efforts there. During the year, we announced a new application named CARDIO mainly used for the early detection of Hypertension related deseases. CARDIO is a by-product of the work we are doing in the field of stroke prevention based on the human vascular system. This new application is currently in clinical trial in the US, Canada, Algeria and Mexico. Net profit (loss) for the healthcare sector: Three-month period ended March 31, 2018 2017 (restated) Variance Revenue 66,593 322,979 (256,386) Costs of services and research and development (323,585) (378,710) 55,125 Selling and administrative (544,663) (787,021) 242,358 Loss before other items (801,655) (842,752) 41,097 Interest expense (155,978) (448,792) 292,814 Share of loss from an associate (418,916) - (418,916) Loss before income taxes (1,376,549) (1,291,544) (85,005) Income taxes (192,191) - (192,191) Net loss (1,184,358) (1,291,544) 107,186 Year ended March 31, 2018 2017 (restated) Variance Revenue 1,292,821 1,803,510 (510,689) Costs of services and research and development (1,297,719) (1,207,072) (90,647) Selling and administrative (2,709,519) (2,583,551) (125,968) Loss before other items (2,714,417) (1,987,113) (727,304) Interest expense (827,771) (955,380) 127,609 Share of loss from an associate (418,916) - (418,916) Loss before income taxes (3,961,104) (2,942,493) (1,018,611) Income taxes (192,191) - (192,191) Net loss (3,768,913) (2,942,493) (826,420) The main variances are discussed in the overall performance section of this document. 4
Natural resources (CARDS) DIAGNOS uses its proprietary software application CARDS (Computer Aided Resources Detection System) to help mineral exploration professionals identify areas of similarity to known areas of mineralization with a high statistical probability. In combination with modern exploration techniques, CARDS is a tool intended to save both money and time by generating priority targets for exploration. These target areas are presented in either two dimensional or three dimensional images to help target and prioritize exploration efforts. In addition to target generation, DIAGNOS offers project management services including geological consulting services. Under specific agreements, DIAGNOS is entitled to receive royalty payments arising from economic resource discoveries realized as a result of using CARDS. These royalties are payable in either shares, cash and/or in net smelter returns on revenues derived from mining operations within the limits of the properties as defined in the agreements. On March15 th, 2017, the Corporation announced the sale of the assets from its mining division to Majescor Resources Inc. ( Majescor ). Under the terms of the agreement, Majescor issued 8,000,000 common shares of its share capital to DIAGNOS, at a deemed price of 0.10 per share, in payment for the acquired assets. Additionally, Majescor will remit to DIAGNOS (i) 50% of any payment that Majescor receives from the royalty agreements forming part of the acquired assets, and (ii) 5% of revenues generated by the commercialization of the CARDS System. As of May 25 th, 2017, the Corporation operates only one segment, healthcare, following the sale of the mining division. Net profit (loss) for the natural resources sector: Three-month period ended March 31, 2018 2017 (restated) Variance Revenue - 35,000 (35,000) Costs of services and research and development - (70,753) 70,753 Selling and administrative - (34,294) 34,294 Loss before interest - (70,047) 70,047 Interest expense - - - Net loss - (70,047) 70,047 Year ended March 31, 2018 2017 (restated) Variance Revenue 320,000 586,541 (266,541) Costs of services and research and development (24,207) (463,878) 439,671 Selling and administrative (47,964) (109,715) 61,751 Profit before interest 247,829 12,948 234,881 Interest expense - - - Gain on disposals of intangible assets 623,919-623,919 Net profit 871,748 12,948 858,800 The main variances are discussed in the overall performance section of this document. 5
Development of the Business The main events which contributed to the development of the business over the past year are as follows: June 2017: DIAGNOS received approval for trading on the OTCQB Venture market. August 2017: Appointments of new chairman of the board of directors and new chief medical officer. August 2017: Expansion in Saudi Arabia. September 2017: Timelines on cardiovascular desease prevention test development and commercialization plans. October 2017: Private placement of convertible notes for gross proceeds of 1,000,000. October 2017: Expansion in Cambodia. April 2018: Appointment of new director, Dr. Reid Maclellan. June 2018: Partnership with the CHUM showcasing CARA. June 2018: New CARA high blood risk assessment tool. July 2018: Private placements of (i) convertible debentures for gross proceeds of 800,000 and (ii) common shares for gross proceeds of 60,000. Summary of quarterly results The following financial information for the eight most recently completed three-month periods is derived from the Corporation s financial statements. 2018 2017 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 March 31, Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30, 2018 2017 2017 2017 2017 2016 2016 2016 (restated) Revenue 66,593 937,426 269,404 339,398 357,979 1,403,271 363,261 265,540 Net income (loss) (1,041,793) (544,360) (834,601) (476,411) (1,361,591) 62,179 (941,698) (688,435) Comprehensive income (loss) Comprehensive income (loss) per share (1,112,207) (285,919) (1,093,621) (410,714) (1,299,844) 15,274 (957,614) (573,098) (0.01) 0.00 (0.01) 0.00 0.00 0.00 (0.01) (0.01) 6
Overall performance This section provides an analysis of the Corporation s financial performance, financial condition and resulting cash flows during the periods covered by this MD&A. Net results The comparative financial information for the comparative three-month and year ended March 31, 2018 contained in this section is derived from the Corporation s financial statements. Three-month period ended Year ended March 31, March 31, 2018 2017 (restated) 2018 2017 (restated) Revenue 66,593 357,979 1,612,821 2,390,051 Operating expenses 725,683 1,270,778 4,079,409 4,364,216 Interest expense 155,978 448,792 827,771 955,380 Share of loss from associate, including impairment 418,916-418,916 - Gain on disposal of the mining division - - (623,919) - 1,300,577 1,719,570 4,702,177 5,319,596 Loss before income taxes (1,233,984) (1,361,591) (3,089,356) (2,929,545) Decrease (increase) in loss before income taxes 127,607 (159,811) The variations in loss before income taxes are attributable to: Three-month period ended Year ended March 31, 2018 Decreases in revenue (291,386) (777,230) Decreases in costs of services and research and development 125,879 349,024 Decreases (increases) in selling and administrative expenses 419,216 (64,217) Decreases in interest expense 292,814 127,609 Share of loss from associate (418,916) (418,916) Gain on disposal of the mining division - 623,919 127,607 (159,811) The overall decrease in revenue is attributable to the decrease in the number of signed agreements from the healthcare sector and the sale of the mining division during the quarter ended June 30th, 2017. The overall decrease in costs of services and research and development is mainly due to the decrease in delivery of services costs attributable to the global decrease in revenues derived from CARA and the sale of the mining division during the quarter ended June 30 th, 2017. The increase in selling and administrative expenses, for the year ended March 31, 2018, is mainly attributable to increases in (i) sales commissions related to the global increase in revenue for the last two quarters of the fiscal year ended March 31, 2017, for which receivables as at March 31, 2017 were collected in the quarter ended June 30 th, 2017 and (ii) incentives paid to officers of the Corporation. 7
The decrease in interest expense is mainly attributable to the repayment of short-term loan during the quarter ended June 30 th, 2017. Share of loss from associate represents the net loss from the results of Albert Mining attributable to the Corporation. Gain on disposal of intangible assets arose from the selling of the mining division during the quarter ended June 30 th, 2017. When evaluating its overall financial performance, the Corporation s analysis is based on the following key performance indicators: capacity to increase revenues capacity to generate positive cash flows from operating activities capacity to deliver results capacity to innovate Capacity to increase revenues To increase its revenues, the Corporation strives to generate sales in existing and new geographic markets. Bookings, Revenues and Backlogs The Corporation s backlog provides an indicator when forecasting its short-term revenues. The backlog is mainly composed of sales bookings for products and services not yet delivered or rendered as of period end. 8
The following table presents the comparative evolution of the backlog for the comparative three-month and year ended March 31, 2018 and is followed by an analysis of the material variances. Three-month period ended Year ended March 31, 2018 March 31, 2018 CARA CARDS Total CARA CARDS Total Opening backlog - - - 24,600-24,600 Bookings 66,593-66,593 1,527,960 320,000 1,847,960 Adjustments - - - (259,739) - (259,739) Revenues (66,593) - (66,593) (1,292,821) (320,000) (1,612,821) Ending backlog - - - - - - Three-month period ended Year ended March 31, 2017 March 31, 2017 CARA CARDS Total CARA CARDS Total Opening backlog 91,093 28,250 119,343 310,586 78,250 388,836 Bookings 296,577 35,000 331,577 1,590,179 536,541 2,126,720 Amendments (40,091) (28,250) (68,341) (72,655) (28,250) (100,905) Revenues (322,979) (35,000) (357,979) (1,803,510) (586,541) (2,390,051) Ending backlog 24,600-24,600 24,600-24,600 Variations for the three-month period Variations for the year ended March 31, 2018 ended March 31, 2018 CARA CARDS Total CARA CARDS Total Bookings (189,893) (6,750) (196,643) (249,303) (188,291) (437,594) Revenues (256,386) (35,000) (291,386) (510,689) (266,541) (777,230) Analysis of the material variances for the comparative three-month and year ended March 31, 2018: The overall decreases in bookings and revenues from CARA are mainly attributable to the decrease in the number of customers and signed agreements during the year ended March 31, 2018. The overall decreases in bookings and revenues from CARDS are attributable to the sale of the mining division during the quarter ended June 30 th, 2017. 9
Net profit (loss) per sector: Healthcare Year ended March 31, Year ended March 31, 2018 2017 Natural resources Total Healthcare Natural resources Total Revenue 1,292,821 320,000 1,612,821 1,803,510 586,541 2,390,051 Costs of services and research and development (1,297,719) (24,207) (1,321,926) (1,207,072) (463,878) (1,670,950) Selling and administrative (2,709,519) (47,964) (2,757,483) (2,583,551) (109,715) (2,693,266) (Loss) income before other items (2,714,417) 247,829 (2,466,588) (1,987,113) 12,948 (1,974,165) Interest expense (827,771) - (827,771) (955,380) - (955,380) Share of loss from an associate (418,916) - (418,916) - - - Gain on disposal of the mining division - 623,919 623,919 - - - Net (loss) income before income taxes (3,961,104) 871,748 (3,089,356) (2,942,493) 12,948 (2,929,545) 93% of revenues earned from the healthcare sector for the year ended March 31, 2018 were attributable to one governmental organization (March 31, 2017-74%). Geographical segments The following table presents the comparative revenues by country for the three-month and year ended March 31, 2018: Three-month period ended March 31, Year ended March 31, 2018 2017 Variance 2018 2017 Variance Mexico - 148,904 (148,904) 1,171,037 1,330,457 (159,420) Canada 44,988 25,126 19,862 373,723 586,541 (212,818) Bangladesh - - - 5,754-5,754 India - (2,134) 2,134-142,809 (142,809) Kenya - 23,048 (23,048) - 59,345 (59,345) Nigeria - 58,753 (58,753) 625 58,753 (58,128) United Arab Emirates 5,855 8,200 (2,345) 24,275 56,200 (31,925) Colombia - 49,759 (49,759) - 55,781 (55,781) Turkey - - - - 47,524 (47,524) Malaysia - 46,956 (46,956) - 46,956 (46,956) Saudi Arabia 3,219-3,219 8,301-8,301 Poland - - - 1,985 3,060 (1,075) United States of America 12,130 (633) 12,763 21,748 2,625 19,123 Slovakia 401-401 5,373-5,373 66,593 357,979 (291,386) 1,612,821 2,390,051 (777,230) Mexico The Corporation has one place of business in Mexico City which is responsible for revenues and expenses from sales activities in Mexico. The revenues were derived from the healthcare sector (CARA) and are attributable to one governmental organization. The decrease in revenue for the year ended March 31, 2018 is mainly explained by a change in the government, which was outside of the Corporation s control. Diagnos is still negotiating with the Mexican government for an expansion of our services in 2018-2019. 10
Canada The head office of the Corporation is located in Brossard, Canada and is responsible for the revenues and expenses derived from sales activities in Canada, the United Arab Emirates, the United States of America, Kenya, Nigeria, Turkey, Malaysia, Switzerland and Colombia. Essentially all of the revenues were derived from the natural resources sector (CARDS). The decrease in revenue for the year ended March 31, 2018 is due to the sale of the mining division in the first quarter ended June 30, 2017. India, Nigeria, United Arab Emirates, Poland The revenues from those countries were derived from the healthcare sector (CARA) and are attributable to one global client with activities in the pharmaceutical industry. The decrease in revenue in those countries for the year ended March 31, 2018 is mainly due to the non-renewal of contracts ended in the year ended March 31, 2017. Bangladesh, Saudi Arabia, United States of America, Slovakia The revenues from those countries were derived from the healthcare sector (CARA) and are attributable to four clients with activities in the primary care sector. Other countries The Corporation has one office in Mumbai which is responsible for revenues and expenses derived from sales in India. The Corporation has one place of business in Warsaw which is responsible for revenues and expenses derived from sales activities in Poland. Capacity to generate positive cash flows from operating activities To generate positive cash flows from its operating activities, the Corporation strives to increase sales receipts and continues to monitor operating costs and related disbursements. The following table contains information taken from the Corporation s consolidated financial statements and details the cash flows derived from operating activities: Year ended March 31, 2018 2017 Variance Net loss (2,897,165) (2,929,545) 32,380 Items not affecting cash 324,955 718,542 (393,587) Payment of interest 650,559 379,086 271,473 Net change in non-cash operating working capital items (321,944) 45,014 (366,958) Cash flows from operating activities (2,243,595) (1,786,903) (456,692) The negative variance in cash flows from operating activities of 456,692 is mainly attributable to the decrease in revenues of 777,230 for the year ended March 31, 2018 and the non-cash gain on disposal of the mining division of 623,919 booked during the quarter ended June 30 th, 2017. 11
Capacity to deliver results The Corporation s sales agreements usually imply rendering services over a defined period of time. Consequently, sufficient working capital and cash liquidities are required to execute the sales agreements and to continue supporting business development initiatives. The Corporation s current level of revenues is not sufficient to cover its expenses and ongoing commitments, thereby resulting in negative cash flows generated from operating activities. The Corporation's ability to generate positive cash flows from operating activities is dependent on achieving and maintaining profitable operations. Since inception, the Corporation has been able to finance its activities and operate on a going concern basis through issuances of shares, stock warrants and debt. To raise additional funds if and when required, the Corporation s current strategy is expected to be, but not limited, to the issuance of common shares, convertible financial instruments and stock warrants. Based on the current level of liquidities and sales activities, the realization of assets and the discharge of its liabilities in the ordinary course of business remain uncertain. In order to address these uncertainties, the Corporation has implemented some or all of the following measures: Continue the process of renewing contracts Reduce operating cost Continue to seek debt financing Continue to seek equity financing Continue to evaluate possible M&A opportunities Capacity to innovate To improve existing products and continue to innovate, the Corporation has in place a team of scientists dedicated to the development of CARA. The Corporation s research and development activities are performed at the head office in Canada. The Corporation benefits from research and development (R&D) tax credits where, historically, approximately 15% of its overall R&D expenses are refunded by the Government of Quebec. For the comparative years ended March 31, 2018, refundable tax credit provisions in proportion to the overall R&D expenses represent: Year ended March 31, 2018 2017 R&D expenses () 760,216 1,175,265 R&D tax credit provisions () 99,208 101,470 R&D tax credit in proportion to R&D expenses 13% 9% Based on current activities and current legislation, the R&D tax credit percentage in proportion to R&D expenses is expected to be approximately 12% for the foreseeable future. 12
Expenses analysis The comparative financial information on expenses, for the comparative three-month and years ended March 31, 2018, contained in this table is derived from the Corporation s consolidated financial statements and is followed by an analysis of the material variances. Costs of services and research and development Three-month period ended Year ended March 31, March 31, 2018 2017 2018 2017 323,584 449,463 1,321,926 1,670,950 Selling and administrative 402,099 821,315 2,757,483 2,693,266 725,683 1,270,778 4,079,409 4,364,216 Variations for the three-month period ended Variations for the year ended March 31, 2018 March 31, 2018 % % Costs of services and research and development 125,879 28% 349,024 21% Selling and administrative 419,216 51% (64,217) (2%) 545,095 43% 284,807 7% Costs of services and research and development The overall decrease for the year ended March 31, 2018 is mainly due to the decrease in delivery of services costs attributable to the global decrease in revenues derived from CARA and the sale of the mining division during the quarter ending June 30 th, 2017. Selling and administrative The increase of 64,217, or 2%, for the year ended March 31, 2018, is mainly attributable to increases in (i) sales commissions related to the global increase in revenue for the last two quarters of the fiscal year ended March 31, 2017 for which receivables as at March 31, 2017 were collected in the quarter ended June 30 th, 2017 and (ii) incentives paid to two officers of the Corporation. 13
Financial position analysis The comparative financial information contained in this section is derived from the Corporation s condensed consolidated financial statements. As at March 31, 2018 March 31, 2017 Cash and non-restricted short-term investments 150,291 189,861 Accounts receivable 531,132 786,274 Other current assets 108,528 100,294 Non-current assets 734,296 232,816 Total assets 1,524,247 1,309,245 Accounts payable and accrued liabilities 614,972 934,383 Other current liabilities 48,131 1,718,075 Non-current liabilities 4,497,829 1,571,059 Shareholders' deficiency (3,636,685) (2,914,272) Total liabilities and shareholders deficiency 1,524,247 1,309,245 Working capital (deficiency) 18,320 (1,676,323) Increase in working capital 1,694,643 The working capital varied as follows: Working capital at the beginning of the year (1,676,323) Net proceeds from a private placement of convertible debentures 2,276,894 Net proceeds from a private placement of convertible notes 994,750 Exercise of stock warrants and stock options 373,147 Conversion of debentures 1,140,000 Conversion of short term loan 150,000 Cash flows used in operating activities (2,243,595) Repayment of short term loans (533,000) Payment of interests (650,559) Others 187,006 1,694,643 Working capital at the end of the year 18,320 14
Based on the current level of liquidities and sales activities, the realization of assets and the discharge of liabilities in the ordinary course of business remain uncertain. In order to address these uncertainties and improve its financial position, the Corporation is evaluating the implementation of some or all of the following measures: Liquidity risk Risk mitigation measures Funding of operating and financing expenses Continue the process of renewing contracts Reduce operating costs Continue to seek debt financing Continue to seek equity financing Continue to evaluate possible M&A opportunities The Corporation believes that with the above measures it will be able to improve its financial position. There is, however, significant risk and uncertainty associated with the measures described above. Commitments and off-balance sheet arrangements Under the terms of an operating lease agreement in Canada, which will expire in September 2019, the Corporation is committed to making minimum annual lease payments of 108,324 for the duration of the lease. Under the terms of an operating lease agreement in Mexico, which will expire in June 2018, the Corporation is committed to making minimum annual lease payments of 31,164 for the duration of the lease. Share information As at March 31, 2018, the number of common shares and convertible securities outstanding is: Common shares 172,421,265 Stock warrants 6,220,000 Conversion options 38,950,000 Stock options 12,426,684 230,017,949 15
Transactions between related parties The Corporation s related parties include its subsidiaries and associate entities as well as the Corporation s key management personnel. Key management personnel include directors and officers. Transactions with key management personnel, directors and officers are as follows: Three-month period ended Year ended March 31, March 31, 2018 2017 2018 2017 Base Salary 130,000 154,021 (16%) 512,500 559,438 (8%) Stock based compensation 12,276 71,887 (83%) 139,928 83,972 67% Incentives - 5,000 (100%) 150,000 40,000 275% Sales commissions 1,001 563 78% 111,972 79,495 41% Interest on demand loan 121 - n/a 1,940 - n/a Payment of interest on demand loan (121) - n/a (1,940) - n/a 143,277 231,471 (38%) 914,400 762,905 20% The overall increase in stock based compensation is attributable to an increase in the number of stock options granted during the last 12 months. The increase in sales commissions is related to the global increase in revenue for the last two quarters of the fiscal year ended March 31, 2017, for which receivables as at March 31, 2017 were collected in the quarter ended June 30 th, 2017. Sales commissions become payable upon reception of payment from the customer. Incentives were paid to two officers of the Corporation in the form of cash bonuses. During the quarter ended September 30 th, 2017, the Corporation advanced 40,000, no interest bearing, to an officer which will be repaid against sales commissions. The following table presents the outstanding balances with key management personnel. As at March 31, 2018 March 31, 2017 Demand loan receivable, annual interest rate of 4% 46,749 43,500 Sales commissions advance, no interest 21,558 - Convertible debentures, annual nominal interest rate of 10% (30,000) (500,000) Convertible notes, annual nominal interest rate of 10% (500,000) - 16
The outstanding balances with key management personnel varied as follows: Demand loan receivable, annual interest of 4% Year ended March 31, 2018 Sales commissions advance, no interest Convertible debentures, annual interest of 10% Convertible notes, annual interest of 10% Balance, beginning of year 43,500 - (500,000) - Capitalization of interests 3,249 - - - Loan - 40,000 - - Repayment - (18,442) - - Departure of one director - - 500,000 - Private placement - - (30,000) (500,000) Balance, end of year 46,749 21,558 (30,000) (500,000) Critical accounting judgments and key sources of estimation uncertainty In the application of the Corporation s significant accounting policies, management is required to make judgments, estimates, and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from those estimates. The following are the key estimates concerning the future, and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial period. Going concern assumption The Corporation's ability to continue as a going concern is dependent on completing an additional financing, achieving and maintaining profitable operations and other factors, all of which are outside of management s control. Management has to assess the outcome of these matters when preparing the Corporation s consolidated financial statements. The Corporation s current level of revenues is not sufficient to cover its expenses and ongoing commitments, resulting in the negative cash flows generated from operating activities. The Corporation's ability to generate positive cash flows from operating activities is dependent on achieving and maintaining profitable operations. The Corporation believes that it will be able to continue as a going concern basis through issuances of shares, stock warrants, convertible notes, convertible debentures and debt. Therefore, the financial statements do not reflect any adjustments that would be necessary if the going concern basis was not appropriate. Tax credits on research and development expenses The Corporation receivables include refundable tax credits on R&D expenses. Management has to make certain careful judgments related to the eligibility of R&D expenses with regards to the provisions of the current tax credit programs. Stock-based compensation Stock-based compensation involves the valuation of grants of stock options. The Corporation relies on the fair value obtained by applying the Black - Scholes option pricing model. This model requires making assumptions related to the risk-free interest rate (with a term that matches the expected life of the options), the expected stock price volatility, the expected life of the options and the expected dividend yield on the Corporation s shares. Management also has to estimate the number of options that will eventually vest. 17
Fair value of financial instruments Financial instruments are presented at fair value. In the absence of active markets in the evaluation of financial assets and financial liabilities, the Corporation relies on evaluation techniques based on inputs that are not based on observable market data which could cause the actual results to differ from the estimates. Recognition of deferred tax assets The extend to which deferred tax assets can be recognized is based on an assessment of the probability that future taxable income will be available against which the deductible temporary differences and tax loss carry-forwards can be utilised. In addition, significant judgment is required in assessing the impact of any legal or economic limits or uncertainties in various tax juridictions. Recognition of deferred tax assets Management applies judgment in considering the substance of a lease agreement and wether it transfers substantially all the risks and rewards incidental to ownership of the lease asset. Key factors considered include the length of the base term in relation to the economic life of the asset, the present value of the minimum lease payments in relation to asset s fair value, and wether the corporation obtains ownership of the asset at the end of the lease term Risk management The Corporation is exposed to risks which could have an impact on its capacity to reach its strategic growth objectives. The Corporation strives to control and mitigate the risks through management practices that require the identification and analysis of the risks related to its operations. The following describes the main risks that the Corporation faces: With regards to the Corporation s general activities: Nature of services The Corporation offers interpretation services based on proprietary data mining software applications. Data mining is mainly used to extract knowledge from a set of data. This extraction of knowledge is an interpretation of a given situation with the assistance of a software program. As with many software applications, the results have to be reviewed and validated by the customer s staff. When rendering interpretation services to its customers, the Corporation mitigates the perception of risk by including disclaimer clauses and warranty limitations to indicate clearly the customer s responsibility towards the results. Intellectual Property The market in which the Corporation competes may include new or existing entrants that own, or claim to own, intellectual property, and the Corporation may have to defend itself which can be time-consuming and costly. In some cases, DIAGNOS may be unable to protect its proprietary technology adequately against unauthorized third-party use or copying through reverse-engineering processes which could adversely affect its competitive position. Additionally, DIAGNOS may be faced with individuals and groups who have purchased intellectual property assets for the sole purpose of making claims of infringement and attempting to extract substantive settlements from established companies. Litigation and disputes In the normal course of its activities, the Corporation may be party to various legal proceedings and disputes with customers and suppliers. Legal proceedings may include undetected errors or malfunctions of the services and products, or claims relating to applicable securities laws. A product liability or securities class action could negatively impact the business because of the costs of defending the lawsuit, diversion of employees time and attention, and potential damage to our reputation. The Corporation s insurance policy may not cover all potential claims, or may not be adequate to cover all costs incurred in defense of potential claims or to indemnify us for all liability that may be imposed. Tax credits programs DIAGNOS benefits from R&D tax credits where a portion of its R&D expenses are refunded under a specific program sponsored by the Quebec government. Amendments to this program which would reduce the scope of expenses eligible for refund, or its termination, will result in net increases in R&D expenses. Additionally, audits by tax authorities are performed from time to time and may result in negative impacts on our financial position. 18
Investing activities The Corporation accepts payment in the form of shares from customers for services rendered. Shares traded on a public or private market are subject to market volatility. The Corporation s policy regarding investments in shares is to benefit from increases in their market value. The Corporation sells shares when there are clear indications that any decrease in value may be permanent. The Corporation may also sell or liquidate those investments to fund its operating activities. Volatility of markets The shares of the Corporation are traded on the TSX Venture market and, as with any shares traded on a public market, are subject to market volatility. Profitability - The Corporation has not realized any profits from its operations since its inception. However, the Corporation has been able to operate on a continuous basis. The Corporation's ability to continue as a going concern is dependent on further financings and on achieving and maintaining profitable operations. Human resources The Corporation must attract and retain highly skilled employees and partners with software development and data mining knowledge to be able to stay ahead of its competitors and up to date with technology changes. More specifically regarding healthcare: Market acceptance CARA success depends upon achieving market acceptance in a changing healthcare environment. There can be no assurance that CARA will be accepted and that DIAGNOS will be able to respond effectively to changes in technology or customers' demands. Regulatory approvals Numerous statutes and regulations govern the manufacture and sale of medical or healthcare products in Canada, the United States and other countries. The process of obtaining necessary regulatory approvals can be lengthy, expensive, and uncertain. Product interaction and product support CARA is an in-house hosted web-based application that integrates fundus cameras from leading camera suppliers with an image processing engine over a secure connection. New camera products or new features of existing products may affect compatibility of CARA and may require additional development work or support to insure adaptability. Lack of support or termination of relationships with the leading fundus camera manufacturers could negatively impact the business. Sales strategy The Corporation marketing plan is to market services from CARA worldwide. If the Corporation is unable to build and support effective distribution channels, either directly or through resellers, sales could be negatively impacted or delayed and the Corporation may have to review its sales strategy. Foreign market environment International operations carry certain risks and associated costs in managing a business abroad, such as complications in compliance with, and unexpected changes in legal and regulatory restrictions or requirements, matters governing privacy of personal information, foreign currency fluctuations, difficulties in collecting accounts receivable, withholding taxes regulations, uncertainties of laws and enforcement relating to intellectual property and privacy rights and unauthorized copying of software. Reimbursement of healthcare costs Depending on the country s regulations with regard to the reimbursement of healthcare costs by public or private organizations, services from CARA might not be approved for reimbursement or be subject to specific limits. Budgets and forecasts Sales forecasts are currently prepared, for the most part, from the appreciation and interpretation of the addressable screening markets for retinopathy and are not based on firm orders. Additionally, the Corporation is assuming that it will benefit from repetitive revenues based on the fact that patients screened for retinopathy need to be followed up on a regular basis. Actual results and renewal rates may differ from anticipated levels and any decline may negatively impact the business. 19
Head Office DIAGNOS Inc. 7005 Taschereau Blvd. Suite 340 Brossard, Quebec J4Z 1A7 450 678-8882 or 877 678-8882 Stock Exchange Listing DIAGNOS Inc. shares are listed on the TSX Venture Exchange under the symbol ADK. Transfer Agents and Registrar Computershare Trust Company of Canada Auditor Raymond Chabot Grant Thornton LLP